"No postwar recovery has died in bed of old age--the Federal Reserve has murdered every one of them. The typical pattern is that a few years into a recovery, as unemployment drops and the labor and product markets tighten, wage and price inflation picks up, the wage-price spiral gets moving, and soon the Fed steps in to douse wage demands with a good old-fashioned recession. And the whole cycle starts all over again."

But the last few recessions haven't really followed this narrative. Sure, you can see just a little belch of inflation circa 2007, but the Great Recession was at its root a financial crises tracing back to financialization of mortgage securities and a boom-and-bust in housing prices. Similarly, you can see a little burp of inflation back around 2000, but the recession of 2000-2001 was about the end of the dot-com boom, with a drop in the stock market and an accompanying fall in real investment. Even going back to the 1990-91 recession, there is again a small hop in inflation beforehand, that recession was also related to a boom-and-bust in certain regional housing markets and linked to the widespread failures across the saving-and-loan industry.

In short, the old story of recessions caused by fighting back against a rise in inflation seems outdated. Instead, a number of recent recessions seem to be more fundamentally caused by financial crises. A similar point can be made about other recessions around the world: for example, the recessions in the east Asian financial crisis of 1997-98 or the recession across the euro area in 2011-12 were driven by interactions between exchange rates, international capital movements, and the financial sector, not by fighting off inflation. I found myself mulling over this shift while reading the 87th Annual Report of the Bank of International Settlements s (released June 25, 2017).

As the report spends a couple of chapters discussing, the current and near-term prospects for the global economy are the best they have been for at least a decade. For example, the US unemployment rate had fallen to 4.3% in May, and has now been 5% or lower since September 2015. Thus, the report looks to the middle-term risks:

"The Report evaluates four risks – geopolitical ones aside – that could undermine the sustainability of the upswing. First, a significant rise in inflation could choke the expansion by forcing central banks to tighten policy more than expected. This typical postwar scenario moved into focus last year, even in the absence of any evidence of a resurgence of inflation. Second, and less appreciated, serious financial stress could materialise as financial cycles mature if their contraction phase were to turn into a more serious bust. This is what happened most spectacularly with the Great Financial Crisis (GFC). Third, short of serious financial stress, consumption might weaken under the weight of debt, and investment might fail to take over as the main growth engine. There is evidence that consumption-led growth is less durable, not least because it fails to generate sufficient increases in productive capital. Finally, a rise in protectionism could challenge the open global economic order. History shows that trade tensions can sap the global economy’s strength."

"[A] substantial and lasting flare-up of inflation does not seem
likely. The link between economic slack and price inflation has proved
rather elusive for quite some time now. To be sure, the
corresponding link between labour market slack and wage inflation appears to be
more reliable. Even so, there is evidence that its strength has declined over time,
consistent with the loss of labour’s “pricing” power captured by labour market
indicators. And, in turn, the link between increases in unit labour costs
and price inflation has been surprisingly weak.
The deeper reasons for these developments are not well understood. One
possibility is that they reflect central banks’ greater inflation-fighting credibility.
Another is that they mainly mirror more secular disinflationary pressures associated
with globalisation and the entry of low-cost producers into the global trading system,
not least China and former communist countries. Alongside technological pressures,
these developments have arguably sapped both the bargaining power of labour and
the pricing power of firms, making the wage-price spirals of the past less likely.
These arguments suggest that, while an inflation spurt cannot be excluded, it
may not be the main factor threatening the expansion, at least in the near term.
Judging from what is priced in financial assets, also financial market participants
appear to hold this view."

Given the good news of weak inflation, it seems plausible that the next recession will arise out during the next financial crisis. At least right now, such a crisis seems most likely to arise outside of the US and European economies. Instead, there are some troubling signs of excessive debt and financial strain in some emerging market economies, as well as in Canada. The BIS report notes:

"The main cause of the next recession will perhaps resemble more closely that of the latest one – a financial cycle bust. In fact, the recessions in the early 1990s in a number of advanced economies, without approaching the depth and breadth of the latest one, had already begun to exhibit similar features: they had been preceded by outsize increases in credit and property prices, which collapsed once monetary policy started to tighten, leading to financial and banking strains. And for EMEs [emerging market economies], financial crises linked to financial cycle busts have been quite prominent, often triggered or amplified by the loss of external funding; recall, for instance, the Asian crisis some 20 years ago. ...

"Admittedly, such risks are not apparent in the countries at the core of the GFC [global financial crisis], where domestic financial booms collapsed, such as the United States, the United Kingdom or Spain. ... Rather, the classical signs of financial cycle risks are apparent in several countries largely spared by the GFC, which saw financial expansions gather pace in its aftermath. ...

"Financial cycles have been a key determinant of macroeconomic dynamics and financial stability. Peaks in the financial cycle have tended to signal subsequent periods of banking or financial stress. From this perspective, ongoing or prospective financial cycle downturns in some EMEs and smaller advanced economies pose a risk to the outlook. Such risks can be assessed through early warning indicators of financial distress. One such indicator is the credit-to-GDP gap, defined as the deviation of the private non-financial sector credit-to-GDP ratio from its long-term trend. Another is the debt service ratio (DSR), ie the same sector’s principal and interest payments in relation to income, measured as deviation from the historical average. These indicators have often successfully captured financial overheating and signalled banking distress over medium-term horizons in the past. ...

"Standard metrics, such as credit-to-GDP gaps, signal financial stability risks in a number of EMEs, including China and other parts of emerging Asia. Gaps are also elevated in some advanced economies, such as Canada, where problems at a large mortgage lender and the credit rating downgrade of six of the country’s major banks highlighted risks related to rising consumer debt and high property valuations. ... Financial cycles in this group are at different stages. In some cases, such as China, the booms are continuing and maturing; in others, such as Brazil, they have already turned to bust and recessions have occurred, although without ushering in a full-blown financial crisis."

An interrelated problem here is that a lot of the borrowing in the world happens with financial instruments that involve US dollars. When an economy outside the US has large US-dollar denominated debts (whether these debts are private or public sector), that economy is vulnerable to a shift in exchange rates that make it harder to repay such debts, or to a change in financial conditions that makes it harder or more costly to roll over the US-dollar denominated debt. The BIS writes:

"EMEs face an additional challenge: the comparatively large amount of FX [foreign exchange] debt, mainly in US dollars. Dollar debt has typically played a critical role in EME financial crises in the past, either as a trigger, such as when gross dollar-denominated capital flows reversed, or as an amplifier. The conjunction of a domestic currency depreciation and higher US dollar interest rates can be poisonous in the presence of large currency mismatches. From 2009 to end-2016, US dollar credit to non-banks located outside the United States – a bellwether BIS indicator of global liquidity – soared by around 50% to some $10.5 trillion; for those in EMEs alone, it more than doubled, to $3.6 trillion. ...

"The patterns highlighted above suggest that global US dollar funding markets are likely to be a key pressure point during any future market stress episode. Non-US entities’ US dollar funding needs remain large, posing potentially sizeable rollover risks. They are also concentrated on a rather limited number of major banks. Interconnectedness is another important factor, as dollar funds are sourced from a variety of bank and non-bank counterparties to support both outright US dollar lending and various types of market-based dollar intermediation. In this context, counterparties such as MMMFs [money market mutual funds], insurance companies and large corporates interact with banks in a range of markets, including those for repos and FX swaps. In addition, many of the same banks provide services to entities such as CCPs [central counterparties], which – under stress – can be a source of large liquidity demands."

Of course, pointing to some potential economic danger signs a few years off in the future is not a forecast that another crisis will actually occur. My point is that when we worry about potential causes of the next recession and changes in central bank policy, including Federal Reserve policy, we should be paying a lot less attention to risks of inflation--which seems to be in a coma, if not actually dead and buried--and a lot more attention to risks of financial overheating as they arise around the world.

"For Tax Year 2014, there were almost 6.3 million individual income tax returns with an expanded income of $200,000 or more, accounting for 4.2 percent of all returns filed for the year. Of these, 9,692 returns had no worldwide income tax liability. This was a 24.2-percent decline from the number of returns with no worldwide income tax liability for 2013, and the fifth decrease in a row since reaching an all-time high of 19,551 returns in 2009. This article presents detailed data for high-income returns for 2014 and summary data for the period 1977 to 2013."

The report has lots of detail on patterns in these tax returns. Here, I'll focus on two points: the actual income taxes paid by different groups, and what's going on with those who have over $200,000 in income, but don't owe anything in income taxes.

This graph provides some evidence on income taxes paid by various groups (that is, payroll taxes, property taxes, and other taxes are not included here). The four sets of bars represent four income groups: under $50,000, $50,000 to $100,000, $100,000-$200,000, and $200,000 and up. For each income group, the bars show the share of people in this group paying a certain share of their income in taxes, grouped into six categories. Of the group with $200,000 or more in income, 0.2% paid 0 percent or less in income taxes; 2.6% paid more than zero but less than 10 percent; 9.6% paid more than 10% but under 15 percent; 38.1% paid between 15-20%; 28.5% paid 20-25%; and 21.1% paid 25 percent or more of income in the form of income taxes.

High-income, zero tax returns have often been about 0.1-0.2% of all tax returns, with the higher values falling in recession years. However, this value spiked up during the Great Recession, and only by 2014 had it fallen back in to the usual historical range.

What's happening with this group? Bryan breaks down what provisions of the tax code that have the biggest effect in reducing the taxes owed for this group, and reports:

"It is possible for certain itemized deductions and certain exclusions from income to lead to nontaxability by themselves, but high-income returns are more often nontaxable for a combination of reasons, none of which alone would result in nontaxability. ... Of the 9,692 returns without any worldwide income tax and expanded incomes of $200,000 or more, the most important item in eliminating tax, on 54.7 percent of returns, was the exclusion for interest income on State and local Government bonds ... The next three categories that most frequently had the largest primary effect on taxes were: 1) the medical and dental expense deduction (15.6 percent or 1,509 returns); 2) the charitable contributions deduction (8.5 percent or 819 returns); and 3) the foreign-earned income exclusion (6.6 percent or 638 returns). The item that was most frequently the secondary effect in reducing regular tax liability on high expanded-income returns with no worldwide income tax was the deduction for taxes paid (24.4 percent or 2,365 returns). The next three categories that most frequently had the largest secondary effect in eliminating taxes were: 1) the charitable contributions deduction (12.7 percent or 1,229 returns); 2) capital gains taxed at 0 percent (12.2 percent or 1,183 returns); and 3) the medical and dental expense deduction (11.3 percent or 1,094 returns)."

The small number of those who have high incomes but no income tax don't bother me much. It's a big country. A few rich people will put all their wealth into tax-free bonds. Some will have a few years of making very large charitable contributions, or very high medical expenses. Some will have earned much of their income in another country, and so pay income taxes there. When you hear about high-income people who don't pay income tax, it's pretty much always a situation with exceptional circumstances, and certainly not a general rule.

Tuesday, June 27, 2017

The city of Seattle raised its minimum wage to $11/hour for many employers April 1, 2015, and then to $13/hour minimum wage in January 2016, with ongoing rises up to $18/hour in years to come. The Seattle Minimum Wage Study Team, based at the University of Washington, is making an ongoing effort to study the effects of this rise in the minimum wage as it happens.

"Our preferred estimates suggest that the Seattle Minimum Wage Ordinance caused hours worked by low-skilled workers (i.e., those earning under $19 per hour) to fall by 9.4% during the three quarters when the minimum wage was $13 per hour, resulting in a loss of 3.5 million hours worked per calendar quarter. Alternative estimates show the number of low-wage jobs declined by 6.8%, which represents a loss of more than 5,000 jobs. These estimates are robust to cutoffs other than $19. A 3.1% increase in wages in jobs that paid less than $19 coupled with a 9.4% loss in hours yields a labor demand elasticity of roughly -3.0, and this large elasticity estimate is robust to other cutoffs. ...
Consequently, total payroll fell for such jobs, implying that the minimum wage ordinance lowered low-wage employees’ earnings by an average of $125 per month in 2016."

The finding is getting a fair amount of attention, because the researchers have some especially interesting data. A lot of minimum wage studies have data on total earnings--which is collected for Social Security and tax purposes--but not on hours worked. However, the state of Washington collects data both on hours and earnings. The authors note:

"The analyses use data from the State of Washington Employment Security Department (ESD), collected quarterly from all employers in the state. Washington is one of only 4 states that collects hours worked, in addition to earnings, in these data. These unique data allow us to identify jobs that pay low wages and workers who earn low wages. Prior studies without hours data have had to define `low wage jobs' imperfectly (e.g. by focusing on the food service industry or teenage workers)."

The key difficulty in any minimum wage study lies in choosing a comparison group. For example, one approach might be just to compare Seattle before the minimum wage increase and after. But this "time series" approach has largely fallen out of favor, because so many different factors might be affecting Seattle's labor market at any given time, and it's hard to sort out the minimum wage effects from other factors.

Thus, the study takes an alternative approach and selects several comparison groups. For example, one comparison is between Seattle and the rest King County that surrounds Seattle. Another comparison is to three other counties that surround King County, but do not actually border Seattle. Yet another comparison is carried out by doing a statistical comparison of how Seattle varied in the past compared to other counties across the state and building up to a "synthetic" comparison group by weights those other counties according to how much they have been coordinated with Seattle. All of these comparisons try to look at areas that have similar economic influences to Seattle, and thus would have similar ups and downs, except for the change in Seattle's minimum wage laws. None of these approaches is perfect by itself, of course. But looking at a group of potential comparisons, and thinking about the strengths and weaknesses of each comparison, gives a reasonable range of outcomes.

Every economic study comes hedged about with warnings and issues, which the authors take care to enumerate. Here are a few of them:

1) The estimate of how much a higher minimum wage reduced hours and jobs in this study is fairly high, compared to other minimum wage studies. Why might this be so? The authors point out that Seattle had already started from the nation’s highest state minimum
wage at $11/hour, and then raised it substantially higher. Their previous study, looking only at the minimum wage increase to $11/hour in 2015, found much smaller effects. Thus, one way to interpret these findings is that moderate raises in the minimum wage up to about $11/hour have smaller effects on hours worked, but pushing substantially higher will have a noticeably negative effect.

2) Obviously, this is a study of Seattle, where the unemployment rate is a rock-bottom 3.1%. The effects of a minimum wage are likely to be different in a place where the unemployment rate is substantially higher.

3) An issue for a city-level minimum-wage law is that it's fairly easy for a number of employers to focus their hiring outside the city, thus avoiding the law. The study can look for signs of this effect: for example, if this kind of shifting is a big deal, it will probably be happening to a greater extent from Seattle to the areas of King County around the city, rather than shifting to the counties that are further away or to the "synthetic" comparison group. But it's hard to analyze such shifts. In addition, a state-level or federal-level rise in the minimum wage law would not be as susceptible to such shifts.

4) There are a number of other tricky issues like the fact that the state-level data doesn't cover earnings in the "informal" off-the-books sector of the economy.

As other cities experiment with higher minimum wages, other studies will arrive. As I've said before, I'm happy to let the empirical patterns tell me what to believe. Based on this evidence, jacking up what is already a very high city-level minimum wage to even higher levels is bad for the total earnings of low-wage workers in that city.

"Less than a third of the sub-Saharan population has access to electricity, and around 600,000 premature deaths are caused each year by household air pollution resulting from the use of polluting fuels for cooking and lighting. Solving the issue is a fundamental prerequisite for unleashing sub-Saharan Africa’s economic potential. Given the magnitude of the challenge, only a joint effort involving sub-Saharan African countries and international public and private parties would pave the way to a solution. ...."Electrification rates in sub-Saharan African countries average 35 percent ... The situation is even starker in rural areas, where the average electrification rate in sub-Saharan Africa stands at 16 percent ... Furthermore, the number of people living without electricity in sub-Saharan Africa is rising, as ongoing electrification efforts are outpaced by rapid population growth. ... In sub-Saharan Africa, average electricity consumption per capita is 201 kilowatt-hours (kWh) per year, compared to 4,200 kWh in South Africa and 1,500 kWh in North African countries. The situation is even worse in rural areas of sub-Saharan Africa with access to electricity, where electricity consumption per capita remains even below 100 kWh per year."

For comparison, per capital electricity consumption in high-income countries around the world is about 9,000 kWh. Here's a heat map showing the share of population with access to electricity around the world.Perhaps just as disturbing as the lack of electricity across many areas of Africa is that even the seemingly aggressive plans in place--essentially, to triple electricity capacity by 2030--would lead to less than half of what is needed to provide provide full access to Africa's population at that time (leaving aside the question of what quantity will be available on a per capita basis). Tagliapietra writes:

"The jump in capacity [forecast for 2030] is projected to be based mainly on hydropower (35 percent of total capacity in 2030) and gas (27 percent), plus oil (16 percent), coal (10 percent), solar photovoltaic (6 percent), geothermal (2 percent), biomass (2 percent) and wind (2 percent). Such a development lacks ambition, both quantitatively and qualitatively. From the quantitative perspective, reaching a level of total electrical capacity of 167 gigawatts (GW) by 2030 would not be sufficient to ensure access to electricity to all people in sub-Saharan Africa. The electrical capacity of sub-Saharan Africa would need to be expanded up to 400GW by 2030 in order to guarantee energy access to all."

Of course, there are arguments about how this expansion of electrical capacity should happen. There are on-grid methods like expanding hydropower, which does not emit greenhouse gases, but if done at large scale implies large dams that pose their own environmental and social challenges There are proposals for widespread use of off-grid or mini-grid sources, from renewables to diesel generators. I'm open to all kinds of proposals, as long as the plausible addition to electrical capacity is genuinely large--a multiple of existing levels.

The current electricity utilities across Africa are not financially sustainable,and aren't up for this job. "Sub-Saharan African electricity utilities are currently simply not financially sustainable. The seminal study by Trimble et al (2016) showed that across sub-Saharan Africa only the utilities in the Seychelles and Uganda fully cover their operational and capital expenditures. All other sub-Saharan African utilities run in quasi-fiscal deficit (ie defined as the difference between the actual revenue collected and the revenue required to fully recover the operating costs of production and capital depreciation), and thus need to be subsidised by the state."

So the focus has been on outside sources of finance. The amounts involves are not earthshaking in a global context. "Enerdata (2017) estimates that from 2015 to 2030, sub-Saharan Africa will need around $500 billion in investment just to scale-up electricity generation. An equal amount of investment will be needed to scale-up electricity transmission and distribution lines. About $1 trillion by 2030 (or about $70 billion per year) will thus be needed to expand sub-Saharan Africa’s electricity sector in order to ensure universal access to electricity by 2030."

Where might that $70 billion per year come from? One source of funds could easily be a reallocatino within a number of countries in sub-Saharan Africa. At Tagliapietra points out, "Sub-Saharan African countries spend about US$ 25 billion each year in energy. This substantial amount of budgetary resource is mainly used to subsidise inefficient and wasteful electricity utilities and, in certain cases, to subsidise old forms of energy, such as kerosene. Redirecting these resources into productive energy investments would be a vital step in reshaping sub-Saharan Africa’s energy systems."

In recent years, about one-third of the addition to Africa's electrical capacity has come from Chinese-based firms. The US government launched a Power Africa initiative, working with a number of intenational agencies, back in 2013. Congress approved financial support for the program unanimously in February 2016, based on a combination of a worthy goal and the opportunities for US exporters to provide goods and services in support of African electrification. A chunk of Tagliapietra's article is about how Europe might create a parallel initiative. Of course, a mass-scale expansion of electricity is an issue where financial resources are necessary, but not sufficient. Political leadership within nations of Africa will need to play a central role, too.

Those interested in issues relating to the countries of sub-Saharan African might also want to check out these relatively recent posts:

Saturday, June 24, 2017

Alan Blinder is working on a book with the working title The Lamppost Theory:
Why Economic Policy So Often
Comes Up Short. The title is based on an old metaphor that academic economists use to convey their relationship with politicians: “Politicians use economics in the same way that a drunk
uses lampposts—for support rather than illumination.”

"Imagine that rewriting the tax code was assigned to a bunch of
technocratic experts—with instructions from Congress—and then
brought back to Congress for an up-or-down vote. ...

Chances that we’d get a vastly better tax code: about 100%

Chances that this will happen: about 0%

Q: Does that make you think there’s something wrong?"

Of course, Blinder's point is could also be applied to other settings, like health care reform, or reform of public pensions, or allocation of spending within various departments. Indeed, the way in which our political system was able to close some military bases was to have a group of experts come up with a list of what bases would be closed, and then require the political process to confirm or oppose the entire list as a group, rather than picking the list to pieces and eventually doing little or nothing.

It can be hard for group with weak hierarchies to make decisions. Group members need to find a balance between making their own contributions in some areas but acquiescing to the group in others. To make this work, it takes a skilled political leadership with a combination of policy-related and hands-on managerial skills, together with group members who see themselves as acting in the context of a broader whole, not just as grandstanding individuals. The US political system seems lacking in these areas.

Friday, June 23, 2017

The appropriate taxation and regulation of tobacco use is well-trodden ground in US policy: after all, the breakthrough announcement by the US Surgeon General that "smoking is hazardous to your health" happened back in 1964 (for a commemoration of the 50th anniversary, see "Smoking, 50 Years Later," January 28, 2014). But there's a renewed stir about tobacco policy in the last few years, driven this time by an international focus.

For example, back in June 2015 William Savedoff and Albert Alwang wrote "The Single Best Health Policy in theWorld: Tobacco Taxes" (Center for Global Development Policy Paper 062). They write: "Tobacco use is the largest cause of preventable disease and death in the world. ... A 10 percent increase in the real price of cigarettes leads to an average 4 percent reduction in tobacco consumption. ... Tobacco taxes are one of the most cost-effective health interventions available. Using taxes to raise the price of tobacco products in low- and middle income countries costs between US$3 – US$70 for each additional year of life (as measured by Disability Adjusted Life Years or DALYs) (Ranson 2002), comparable to the cost of child immunization."

But for those who want a genuine doorstop of a report summarizing the state of knowledge on these issues, the useful starting point is the nearly 700-page report from the National Cancer Institute and the World Health Organization, "The Economics of Tobacco and Tobacco Control" (December 2016).
It includes an early chapter on "The Economic Costs of Tobacco Use, With a Focus on Low- and Middle-Income Countries," as well as discussions of supply and demand factors affecting tobacco use and the range of public policy options. Here, I'll just mention a few main themes that caught my eye, some of which may be useful for generating classroom discussion and lecture examples.

Pretty much every report on the economics of tobacco taxation, and this one is no exception, quotesAdam Smith's thoughts on the subject (The Wealth of Nations, Book V, Chapter III): "Sugar, rum, and tobacco are commodities which are nowhere necessaries of life, which are become objects of almost universal consumption, and which are therefore extremely proper subjects of taxation. ... In the meantime the people might be relieved from some of the most burdensome taxes; from those which are imposed either upon the necessaries of life, or upon the materials of manufacture."

In calculating the effects of a tobacco tax, a key parameter is how the higher price will affect the quantity of tobacco demanded. The NCI/WHO report notes (footnotes omitted):

"Price elasticity of demand is the key economic concept used to understand or measure changes in cigarette consumption resulting from changes in the excise tax and in the retail price of cigarettes. In an economic context, elasticity refers to the responsiveness of one variable to a change in another variable. The price elasticity of demand measures how responsive demand (or consumption) is to a change in the price of the product. Technically, the price elasticity of demand is the percentage change in the consumption of a product in response to a 1% change in the price of the product, with all else remaining constant. As will be discussed below, nearly all empirical studies have found that the price elasticity of demand for tobacco products lies between zero and minus one. Estimates for high-income countries (HICs) are clustered around –0.4; estimates for low- and middle-income countries (LMICs) are more variable and somewhat greater in absolute terms (further from zero), with estimates clustered around –0.5. In other words, for HICs, a 10% increase in the price of tobacco is expected to decrease tobacco consumption by 4%. For LMICs, a 10% increase in price would be expected to decrease tobacco consumption by 5%. Thus, tax and price increases are a potentially potent tobacco control tool in all countries.

"Many econometric studies have estimated price elasticities for other aspects of tobacco use beyond consumption, including prevalence, cessation, initiation, duration of smoking, frequency of smoking (e.g., daily vs. non-daily), and conditional demand (amount of the product consumed conditional on being a user of that product). Still others have estimated cross-price elasticities of the demand for tobacco products—that is, the impact of a change in the price of one tobacco product (e.g., cigarettes) on the use of another tobacco product (e.g., smokeless tobacco), or of a change in the price of a subcategory of one product (e.g., premium cigarette brands) on the use of a different subcategory of that product (e.g., discount cigarette brands)."

Of course, the responsiveness of tobacco use to tax policy varies by group. For example, the immediate effect of a tobacco tax increase over the short-run of a year or two will be smaller (a common finding is about half as large) than the long-run effect over time. Smoking by younger people, not yet as well-established in the habit, tends to be more responsive to higher tobacco taxes than smoking by older people. And people in lower- and middle-income countries (LMICs) tend to respond more strongly to higher tobacco taxes than those in higher income countries. The NCI/WHO report states:

"In summary, the number of studies based on aggregate measures of tobacco use in HICs is growing. These studies are becoming increasingly sophisticated over time, and the resulting estimates of price elasticity are remarkably consistent. Regarding the short-run price elasticities for cigarette demand, most estimates have clustered around –0.4, with the majority ranging from –0.2 to –0.6. Early studies of tobacco use in LMICs produced wide estimates of price elasticity, with most suggesting that cigarette demand in LMICs is much more responsive to price than cigarette demand in HICs. The rapid expansion of research in LMICs in recent years indicates that the range of price elasticity estimates has narrowed somewhat, with the majority of short-run price elasticity estimates falling between –0.2 and –0.8, with many clustering around –0.5. In all countries, studies that model the addictive nature of tobacco use conclude that the long-run price elasticity of demand is greater than that estimated for the short run. Price elasticity estimates tend to be more inelastic in countries where low-priced, relatively affordable cigarettes are widely available.

"Since the early 1990s, many studies based on U.S. cross-sectional data have confirmed Lewit and colleagues’ 1981 conclusion that youth smoking is more responsive to price than adult smoking. For example, using data from the 1992–1994 Monitoring the Future surveys, Chaloupka and Grossman estimated an overall price elasticity of –1.31 for youth smoking. In a later study with similar findings, Lewit and colleagues examined the impact of cigarette prices on youth smoking prevalence and intentions to smoke. Data for this study came from cross-sectional surveys of 9th-grade students in 1990 and 1992 from the 22 U.S. and Canadian sites in the Community Intervention Trial for Smoking Cessation. This study estimated that the price elasticity of youth smoking prevalence was –0.87, and the price elasticity of intentions to smoke by nonsmoking youth was –0.95. These results indicate that youth are somewhat more sensitive to price than adults."

One difficulty for economists in thinking about tobacco policy is that many of the effects of smoking are felt by the smoker. If people choose to smoke, with knowledge of the health consequences, then who are economists or public health experts to say they are wrong? Of course, the issue of second-hand smoke or the effects of pregnant women smoking are different here--those are external effects on others. But for many smokers, the issue is one that economists sometimes refer to as "internalities," where your own decisions have an undesired and unexpected on yourself. If smokers are hooked by a habit whose power and effects they do not fully anticipate, then one can make a case for policies that make tobacco use more costly, or quitting easier. The report notes:

"Smokers tend to hold erroneous beliefs about smoking and health: They think they will be able to quit when they want to, that low-tar cigarettes are less harmful than other cigarettes, that they are in a lower risk group compared with other smokers, or that the general health risks do not apply to them as individuals. In fact, many adult tobacco users struggle with quitting, the great majority of smokers regret having started, and young people taking up tobacco use significantly underestimate the addictive potential of these products and overestimate their likelihood of quitting in the future."

One reason for the ongoing focus on smoking in low- and middle-income countries is that tobacco taxes are already relatively high in many high-income countries. As a result, the potential gains to public health (and the potential for using tobacco taxes to raise government revenue) are greater in many low- and middle-income countries. Moreover, tobacco taxes in low- and middle-income countries as a group have barely budged in the last couple of decades. The report notes (footnotes and references to tables omitted):

"Total tax burden is defined as the sum of all taxes—including general sales taxes, such as a value-added tax—expressed as a percentage of the retail price. According to the 1999 World Bank publication Curbing the Epidemic: Governments and the Economics of Tobacco Control, the total tax burden on cigarettes is highest in HICs and decreases as a country’s income level decreases. Using 1996 data for the sample of countries in this study, the average tax burden was 67% in HICs, 50% in upper middle-income countries, 46% in lower middle-income countries, and 40% in low-income countries. A similar analysis based on 180 countries was performed by WHO in 2014 using the World Bank’s income categories. Although the choice of descriptive statistics (i.e., unweighted/simple average, weighted average, and median) substantially influences the results, the 2014 WHO data confirm the earlier World Bank findings that the tax burden is higher for HICs and lower for LMICs. In fact, considering unweighted average tax burdens, the picture in 2014 is not different from that in 1996."

The rhetoric around tobacco taxes can become overheated. For example, the preface of the NCI/WHO report states at one point: "Globally, approximately six million people a year die from diseases caused by tobacco use, including 600,000 from exposure to secondhand smoke. This is six million too many. Every single death from tobacco is a preventable tragedy." But the notion that public policy should seek to prevent "every single death from tobacco" is an extreme form of prohibitionism.

People act in many ways affect health: diet, exercise, driving cars, not taking a multivitamin ever day. In all of these areas, public policy can provide some information and incentives for healthier behavior, while still stopping far short of invasive micromanagement of people's day-to-day activities. In the US, federal cigarette taxes were raised dramatically in 2009, and many states have additional tobacco taxes of their own. But in many low- and middle-income countries, raising their low tobacco taxes to higher levels offers a substantial gains to public health--along with a government revenue source that does not discourage working, hiring, or saving.

Thursday, June 22, 2017

Self-made entrepreneurs often generate a mixed public response. On one side, there is often an appreciation for their skills, the economic dynamism they provide, and in some cases for the charitable work funded by their earlier profits. For example, remember the ecomiums written when hard-boiled capitalist and hard-driving manager Steve Jobs died, or consider the current feelings about Bill Gates which are now filtered through the perception of work done by the Gates Foundation. On the other side, there is a deep-seated suspicion that "behind every great fortune is a great crime" (which seems to be an off-kilter paraphrase of a comment from a play by Balzac), and a belief that such a fortune must have resulted in substantial part from hard and exploitative dealing.

"Keayne was born in 1595 in Berkshire, England, not far from Windsor Castle. A humble butcher’s son, he would later note that he had received “no portion from my parents or friends to begin the world withal.” Accordingly, he obtained little in the way of formal education and was apprenticed at 10 years old to John Heyfield, a merchant-tailor in London. ...

"Keayne successfully completed his eight-year contract before striking out on his own. He proved adept at his trade, a blessing that was compounded by marrying well in his early 20s. By 1634, Keayne was prosperous enough to wager £100 on the Massachusetts Bay Company. It was an enormous sum, more than double the yearly income of the average wageworker in Victorian England 250 years later. The risk, however, was in keeping with Keayne’s conscience, which had been inflamed and enlightened by Puritan evangelists, while also being a considered bet by a savvy merchant on the bounty of a brave new world just across the ocean.

"Along with Anne, his wife, and beloved Ben, the only one of his four children to survive infancy, Keayne voyaged to Boston in 1635, swiftly becoming one of the city’s most distinguished and widely despised merchants. In fact, we only know so much about him because of the 50,000-word will that he began writing in 1653, three years before his death, to provide a full account of his life and the probity of his business affairs in order to “cleare myself in all material things.” ...

"In 1639, only four years after he had arrived in town, Keayne was accused of “oppression” in his dealings, a catch-all term that covered any instance of buyers or sellers taking advantage of the ignorance or necessity of one another in a business transaction. The specific charge was that he had sold sixpenny nails for 10 pence a pound, reaping a healthy profit off his neighbor. Too healthy, it seemed, for the customary profit margin on basic goods in the colony was between 10 and 30 percent.

"Keayne argued that the matter was a simple misunderstanding, willful on the part of his accuser. He said that the man had originally purchased sixpenny nails on credit for 8 pence a pound and later exchanged them for eightpenny nails at 10 pence a pound, a profit margin of only 20 percent (hardly a “haynous sine,” Keayne observed in his will). It was only when Keayne asked him to pay off his balance, after giving him ample time to do so, that the man brought his suit to the authorities, with the accusation of oppressive pricing.

"Early on during the trial, Keayne made a strong show of defending himself, with the messenger who delivered the second bag of nails testifying on his behalf, but then a raft of townspeople came forward to levy similar charges against him. As John Winthrop, the governor of the settlement and perhaps the most esteemed man in Boston, wrote in his diary, Keayne was widely known for being “notoriously above others observed and complained of” for the prices he charged and had been “admonished, both by private friends and also by some of the magistrates and elders”—all, it seemed, to no effect. He was convicted by the General Court of the offense, which had broadened beyond a single transaction to encompass a general way of doing business, and fined £200, a sum that was later reduced to £80.

"Had the matter rested there, one suspects that Keayne would still have complained in his will of the “deep and sharpe censure that was layd upon me,” but the incident would not have been the defining moment of his professional career and, perhaps, his life. But then the elders of the First Church of Boston took up the matter to determine whether an ecclesiastical reproach was also warranted.

"Keayne was fortunate to escape the most serious punishment, excommunication. That sentence was passed on eight offenses related to economic matters between 1630 and 1654, a period when only 40 such sentences were given, tantamount, as they were, to consigning one to eternal damnation. Instead, Keayne was formally admonished, according to the records of the First Church, “for selling his wares at excessive Rates, to the Dishonor of Gods name, the Offense of the Generall Cort, and the Publique scandal of the Cuntry,” a censure he lived under until the following May, when he became “Reconciled to the Church.”

"Keayne continued to attend services, and the day after the rebuke was handed down, the Reverend John Cotton, the city’s foremost theologian, delivered a sermon that was obviously inspired by the wayward merchant. The subject, Winthrop wrote in his diary, was the “false principles” of trade that so many merchants seemed to abide by. They were recorded by Winthrop as follows:

That a man might sell as dear as he can, and buy as cheap as he can.

If a man lose by casualty of sea, etc., in some of his commodities, he may raise the price of the rest.

That he may sell as he bought, though he paid too dear, etc., and though the commodity be fallen, etc.

That as a man may take advantage of his own skill or ability, so he may of another’s ignorance or necessity.

Where one gives time for payment, he is to take like recompense of one as of another.

Again, following these bullet points are considered “false principles,” and following such principles was considered grounds for censure or even excommunication. The guiding social/religious principle for merchants, as Rollert quotes in the words of the famous Puritan John Bunyan (author of The Pilgrim's Progress) is that "A man in dealing should as really design his neighbour’s good, profit and advantage, as his own.” In the modern lingo, the parallel comment would be that there is a corporate social responsibility that all stakeholders should be taken into account.

"When his executors came to open this Last Will and Testament they found not only a complicated allocation of his worldly goods but an outpouring of long suppressed indignation, a helter-skelter apologia pro vita sua and a reiterated demand that justice be done him even if only in memory. It had taken him five months to write out the document, and when the will was copied into the first volume of the probate records of Suffolk County it filled no less than 158 pages ...

The resulting 5I,000 words provide an insight into the workings of a seventeenth-century mind. What he had "here writt out of the greife and trouble of my heart" was an appeal to the Puritan conscience of New England to reconsider its "un- christian, uncharitable and unjust reproaches and slandrs" against him, and raised the hope "that such which have taken liberties to load me with divers reproaches and long to lay me under a darke cloude may have cause to see that they have done amisse and now to be sorry for it though they have not beene so before."

Of course, we don't know the ins and outs of the dispute over the price of nails (which were a highly valuable commodity at the time). We do know that Keayne rose from being an impoverished apprentice to being one of the wealthiest men in the Boston of his time. We know that he had enemies, and that some of the accusations made against him were false, and that he a high-profile court case was decided against him. We also know that he gave considerable money to the poor and to the city throughout his life, and even left a bequest to Harvard. We also know that he was often chosen for responsible positions. Baily writes:

"Until his death in 1656, however, despite unpopularity and repeated controversies with his fellow citizens, Robert Keayne continued to fill responsible public positions. He held his earliest public office in 1636, when the Boston Town Meeting elected him to a committee charged with the ordering of all land allotments and other business except elections. In the years that followed he was reelected selectman four times, chosen as a representative to the General Court at least seven times and served in innumerable lesser functions such as surveyor of the highways."

From a modern view, almost 400 years later, Robert Keayne seems like a many of considerable practical talent, trying to combine a life of capitalist success and Puritan moral values--and sometimes getting caught in grinding of these two forces.

Tuesday, June 20, 2017

Union membership and clout has been dropping in the US economy for decades. But it's not just a US phenomenon: a similar drop is happening in many high-income countries. The OECD Employment Outlook 2017 discussed the evidence in "Chapter 4: Collective Bargaining in a Changing World of Work."

Here are a couple of illustrative figures. Across the OECD countries, about 17% of workers belong to a union. As the report notes: "Trade union density has been declining steadily in most OECD and accession countries over the last three decades (Figure 4.2). Only Iceland, Belgium, and Spain have experienced a (very) small increase in trade union density since 1985 ..." In each of the panels, the solid black line is the overall OECD average, for ease of comparison.

Here's a parallel figure showing comparisons across countries for "collective bargaining coverage," which is the share of employees covered by collective bargaining agreements. On average, union bargaining coverage in OECD countries declined from 45% in 1985 to 33% by 2013.

The distinction between these figures should make the point that a number of countries have rules which in some cases require that firms pay non-union workers similarly to union workers. Conversely, many of the same countries also have a raft of possible exceptions to these rules. The OECD chapter provides a more detailed discussion of these ins and outs. But several overall patterns seem clear.

1) Labor union power is weaker just about everywhere.

2) The extent of labor union power varies considerably across countries, many of which have roughly similar income levels. This pattern suggests that existence of unions, one way or another, may be less important for economic outcomes than the way in which those unions function. The chapter notes the importance of "peaceful and cooperative industrial relations," which can emerge--or not--from varying patterns of unionization.

3) In the next few decades, the big-picture question for union workers, and indeed for all workers, is how to adjust their workplace skills and tasks so that they remain valued contributors in an economy characterized by new technologies and global ties. Workers need political representation--whether in the form of unions or in some other form--that goes beyond arguing for near-term pay raises, and considers the difficult problem of how to raise the chances for sustained pay raises and secure jobs into the future.

That's the definition of foreign direct investment from UNCTAD, which has published the World Investment Report 2017: Investment and the Digital Economy. This year's report includes the usual detailed overview of trends, along with some discussion of the evolving policy climate for foreign direct investment and the changing role of digital companies. Notice that FDI is explicitly separated from "portfolio investment," in which international investors buy stocks or bond or other financial assets across financial borders but without any management involvement. The usual believe is that FDI plays an important role in direct facilitation of international trade, and in the diffusion of technology and management expertise across borders, while portfolio investment plays a much smaller role in these areas.

Here are some overall patterns. FDI peaked back in 2007, and the 2016 level of $1.8 trillion it had not yet surpassed that earlier level. Most FDI inflows are to developed economies, although developing economies are not far behind.

What are the major countries for FDI inflows and outflows? The US economy perhaps unsurprisingly tops both lists, but there are some eye-raisers as well. Here's the list for inflows of FDI. Three points catch my eye here. First, notice the huge drop-off in inflows to the UK in 2016, essentially matched by a large rise in inflows to Ireland. My suspicion is that this change is Brexit-related. Second, if one combines the inflows to China, Hong Kong, and Singapore--on the basis that they are all basically China-related--then inflows to the area of China are now essentially the same as those to the US economy. Third, a reason why the UK, Ireland, and Netherlands all rank so high, given that they are actually not large economies in the global context, probably involves ongoing relocations of corporate ownership across national borders: for example, perhaps a US company owns a substantial share of a firm in Netherlands, which in owns a substantial share of a firm based in a third country.

Here's the corresponding figure for outflows of foreign direct investment. Again, the US and China lead the way. But overall, the high-income countries shown in green represent a greater share of FDI outflows than the emerging market countries shown in orange.

We hear a lot about a globalizing world economy. So what explains why FDI has essentially been flat for a decade?

At least some of the reasons seems to be that countries are becoming more skeptical about the potential merits of FDI, and are more likely to impose rules placing limits on foreign buyers if they fear that "strategic" assets might be held by foreign investors, that domestic workers might be laid off, and so on. UNCTAD does a count each year of changed in national investment policies, which are then broadly classified as tending to liberalize or to restrict FDI. Back in the 1990s, pretty much all the changes were on the "liberalization" side. But starting in the early 2000s, the share of such changes involving "restriction" started rising, and is now about one-quarter of the changes in any given year.

On the other side, the rising prominence of digital multinational enterprises has tended to support the level of FDI, and keep it at least flat rather than declining. UNCTAD makes a list of the top multinational enterprises, which are ranked according to the size of their foreign assets: that is, not according to their international sales, or their international visibility, but according to their level of foreign direct investment over time. Because of this method of ranking, as the report notes, "some well-known global digital giants, such as Amazon and Facebook, do not feature in the top 100. Neither do major telecom players, such as Verizon and AT&T, whose domestic assets and revenues are very large, but whose foreign businesses are relatively small."

Thus, here's a picture of the tech and telecom companies in the UNCTAD top 100 list of multinational enterprises, and how the list has evolved in recent years.

As the report explains (citations and parenthetical references to boxes and figures deleted):

"The fast rise of tech MNEs [multinational enterprises] represents one of the most noteworthy trends in the world of global megacorporations in recent years. This phenomenon has attracted increasing attention, not only at the research and policy levels, but also in the broader public. In 2010, the relevance of tech companies in the top 100 MNE ranking compiled by UNCTAD was still limited and not significantly different than 10 years earlier. From 2010 to 2015, in contrast, the number of tech companies in the ranking more than doubled, from 4 to 10, and their share in total assets and operating revenues followed a similar, and even more pronounced, trend . This growing weight results from a group of tech MNEs, mainly from the United States, entering the ranking. Some of these companies, such as Alphabet (Google) and Microsoft, are leading the digital revolution; others, such as Oracle, heavily rely on and benefit from the acceleration of the internet to deliver their value proposition. When including telecom MNEs, other important enablers of the digital economy, 19 MNEs in the top 100 are ICT companies – a sizeable portion of megacorporations. Tech megacorporations are enjoying exceptional growth momentum."

The statistics on foreign direct investment can be hard to disentangle, because ownership of foreign assets is an interconnected and overlapping network that can cross national borders multiple times. But the sheer magnitude of these flows--$1.8 trillion in FDI in 2016--compels attention.

As MacDonald explains, the global economy currently has a "Big Six" of agricultural chemical companies. However, Dow Chemical and DuPont have announced a plan to merge, and Bayer has announced a plan to buy Monsanto, which would reduce the Big Six to the Big Four. At the same time, a state-owned Chinese chemical company called ChemChina has made an offer to buy Syngenta, another one of the Big Six. So here's the current industry, and the proposed transactions, in a table.

As MacDonald explains, the Big Six itself is a fairly recent development: "The “Big Six” emerged in the 1990s and early 2000s, arising from mergers among large chemical, pharmaceutical, and seed

companies as well as from their acquisitions of many smaller seed and biotechnology companies. At the time, the future of integrated life sciences companies promised to use new developments in biotechnology to support work in human pharmaceuticals, seed genetics, and agricultural chemicals. That vision did not reach fruition, as the pharmaceutical businesses later separated from the
seed and agricultural chemical businesses." But now that the Big Six has happened, markets for specific seeds are not surprisingly quite concentrated. For example, here are four-firm concentration ratios (that is, the share of sales by the largest four firms) in US production of corn, cotton, and soybeans, for 2000 and 2015..

The standard set of arguments applies here. Firms involved in mergers always promise "synergies," and in particular, the promises here often argue for a more effective research and development effort. Those who buy the products are more worried that less competition will mean higher prices.

In addition, it's not obvious that larger firms with higher profits will have a more aggressive R&D effort. As Sir John Hicks famously wrote, "The best of all monopoly profits is a quiet life" (in "Annual Survey of Economic Theory: The Theory of Monopoly," Econometrica, January 1935, vol. 3, p. 8). Giant monopolies can often be slow to innovate, because why bother if your customers can't go anywhere else. MacDonald has a simple graph to illustrate this point:

As MacDonald points out, a recent trend had been for antitrust authorities to express concerns that mergers would inhibit R&D. He writes:

"U.S. antitrust enforcement agencies rarely cited innovation concerns in merger challenges through the early 1990s, but they have been increasingly likely to do so since then and have introduced innovation concerns into merger challenges in agriculture. In 2016, the U.S. Department of Justice challenged the purchase of Precision Planting, LLC, by John Deere on the grounds that the acquisition would reduce innovation in high-speed planters. John Deere and Precision Planting, a unit of Monsanto, are the two major producers in this nascent industry. After many years of research, during 2014 each firm introduced high-speed planting systems that allow row crop farmers to substantially increase planting speeds at no cost in accuracy. While the Deere system was bundled into new planters, the Precision Planting product could be sold as a set of components and retrofitted onto existing planting equipment, including Deere’s. The Department argued that intense rivalry between the two led to improved prices for farmers and to the rapid introduction of innovative new features, and that the merger would eliminate that competition."

I can't claim to have made any intensive study of these proposed mergers. But when an industry is already quite concentrated and profitable, my bias is that proposals for further mergers should have some very high hurdles to cross. It will be interesting to see how the antitrust administrators under the Trump administration address this industry.

"There is a large environmental justice literature arguing that low-income and minority people are more likely to be exposed to a whole range of pollutants, and that turns out to be remarkably true for almost any pollutant I’ve looked at. A lot of that has to do with housing segregation; areas that have a lot of pollution are not very desirable to live in so they cost less, and people who don’t have a lot of money end up living there. It also seems to be the case, at least some of the time, that low-income people exposed to the same level of pollutants as higher-income people suffer more harm, because higher-income people can take measures to protect themselves. Think about air pollution. If I live in a polluted place but I have a relatively high income, maybe I have better-quality windows so I have less air coming in, or I can afford to have air purifiers, or I can afford to run my air conditioner. It could even be the case that lower-income people are more vulnerable to the effects of pollution in the first place. For example, someone who is malnourished is more likely to absorb lead than someone who is not malnourished. So people who are better nourished may be better able physiologically to protect themselves against the effects of pollutants."

Reform of Joint and Several Liability

"Joint and several liability, or JSL, is essentially the “deep pockets” rule: If multiple parties are found to be liable for the harm caused, the plaintiff can collect damages from one or all of the parties, regardless of how each one contributed to the harm. So people sue the deep pocket. A hospital is a good example. When Bentley MacLeod and I first started reading about tort cases related to malpractice during child delivery, one of the things that struck us as bizarre is that they often talked about the nurse: The nurse was sitting in the nurse’s station, she didn’t come when I called, she didn’t call the doctor. We wondered, why are they spending so much time talking about what the nurse did or didn’t do? Surely the doctor was the prime mover in deciding treatment? What we eventually realized was, the nurse is the employee of the hospital, whereas doctors are generally working as independent contractors; so if you want to blame the hospital — the deep pocket — you have to tie the nurse to the lawsuit. Most of the time, under JSL, the hospital gets sued and the doctor doesn’t. If the hospital pays, legally it can try to recover damages from the doctor, but they hardly ever do that. Essentially, under JSL, the doctors are working in a regime where they’re never going to get sued. JSL reform makes the payment of damages proportional to the contribution to the harm, which makes it more likely the doctor will be sued. And if the doctor is the decisionmaking agent, then in theory that should improve outcomes."

The Difference between Overprovision and Misallocation of Medical Care

"Many people are concerned about overtreatment and excessive spending, but the problem is more subtle. Bentley, Jessica Van Parys, and I studied heart attack patients admitted to emergency rooms in Florida. We found large differences in how doctors allocated procedures across patients; some doctors were much less likely to use aggressive treatments with older or sicker patients who might have been deemed less appropriate candidates for the treatment. Young, male doctors who trained at a top-20 medical school were the most likely to treat all patients aggressively, regardless of how appropriate the patient seemed to be. In the case of heart attacks, it appears that all patients have better outcomes with more aggressive treatment, so treating only the “high-appropriateness” patients aggressively harms the “low-appropriateness” patients. Similarly, many people are concerned that U.S. doctors perform too many C-sections. But actually, in another paper, Bentley and I found that it looks like too many women with low-risk pregnancies receive C-sections, while not enough women with high-risk pregnancies receive C-sections. So the goal shouldn’t necessarily be to reduce the total number of C-sections but rather to reallocate them from low-risk to high-risk pregnancies."

Monday, June 12, 2017

An AEI-Brookings Working Group on Paid Family Leave has been considering family leave policies during the last year or so, and some results of their deliberations appear in "Paid Family andMedical Leave: An Issue Whose Time Has Come" (May 2017). For the fortunate readers out there who don't concern themselves with the political leanings of DC think tanks, the American Enterprise Institute tends to leans right, while Brookings tends to lean left. Thus, the report is based on views of knowledgeable experts from a range of political perspectives. (For those who want names, the Codirectors of the report are Aparna Mathur and Isabel V. Sawhill, and the other participants are Heather Boushey, Ben Gitis, Ron Haskins, Doug Holtz-Eakin, Harry J. Holzer, Elisabeth Jacobs, Abby M. McCloskey, Angela Rachidi, Richard V. Reeves, Christopher J. Ruhm, Betsey Stevenson, and Jane Waldfogel.)

Some of the themes in the report, while certainly worth making, are not especially new. For example, "the United States is the only advanced nation that does not have a paid leave policy at the national level. The federal Family and Medical Leave Act, passed in 1993, offers 12 weeks of job-protected, unpaid leave, but only about 60 percent of the workforce is eligible for its protections. ... Polls show overwhelming public support for paid family and medical leave ... with almost 71 percent of Republicans and 83 percent of Democrats in favor of a paid parental leave policy."

But economists mistrust polls which ask if people would like to receive a pleasant new benefits, but don't place equal emphasis on the costs. Thus, for me the most intriguing point in the report is that apparently no one in the Working Group, no matter their political leanings, favored requiring an employer mandate for employers to pay the costs of paid leave. As the report notes:

"That said, paid leave generates a variety of concerns
from a business perspective. Most obviously, there are
business costs associated with paid leave if employers
are simply mandated to provide it. For this reason, we think it is worth noting that no one in our working
group favored an employer mandate. ... This approach is popular with the general public. However, we do not favor it for two reasons. First, it would be burdensome on employers, especially small businesses and those employing a disproportionately high share of likely parents. Second, it will likely lead to a reluctance to hire female workers of a certain age. ... Instead, most—
although not all of us—favored a slight increase in the
payroll tax on employees, with a minority in favor of
reduced federal spending in other areas to pay for a
new benefit. "

Here's some additional detail on their argument. As a starting point, here's an international comparison across OECD countries of paid parental leave. On the left, the bars show what percentage of income is replaces for men and for women. On the right, the bars show the length of parental leave. As the figure shows, it's fairly common for countries to have paid parental leave with a length of six months to a year, and it's common for the payments to replace about half of wages.

In the US, a few states have enacted paid parental leave rules. Here's a table giving some description.

As the table helps to illustrate, some of these laws are quite recent, and the evidence on their operation is not in yet. The reason why Washington state isn't included in the table, as the report notes, is: "Washington State has not yet implemented its policy because it has not established a funding mechanism." In the other states, "California, Rhode Island, New Jersey, and New York incorporated paid family and medical leave into the states’ existing TDI [Temporary Disability Insurance] programs, financed through payroll contributions. However, these four states finance the paid family and medical leave benefit exclusively through employee payroll contributions, rather than joint employer/employee contributions ..."

The report is scrupulous in pointing out concerns with the existing US programs, and I'll mention two of them here. One is that the existing programs do relatively little to help lower-income women. Even among those eligible for paid leave in California, the take-up rate of existing benefits has been low.

"Many of the bottom 40 percent of households (by income) are ineligible for job-protected unpaid leave under the FMLA [Family and Medical Leave Act] because they are employed in small firms (with fewer than 50 employees) exempt from the law or because they do not meet the eligibility requirements in terms of hours worked with their current employers. In addition, survey data consistently show that workers in low-income households and those with low educational attainment frequently lack access to any form of paid leave. Moreover, those with fewer resources or less income are much less able to take up this leave even if they are eligible. This has led to a system in which the beneficiaries of current leave policies (whether unpaid or paid by an employer) are primarily those with moderate or high incomes, stable jobs, and employment in larger organizations. ..."

"Ten years after California’s paid family leave policy was implemented in 2004, take-up rates by eligible mothers ranged from 25 to 40 percent. ... A 2011 study found that half of workers eligible for paid leave were unaware of the program, and a third of those who were aware and eligible but who did not apply for family leave reported that the wage-replacement rate was too low. Others cited the lack of job protection or worried that taking leave would make their employer unhappy or hurt their opportunities for advancement."

The report details how the members of the working group differed on a number of points, as one might expect given the membership of the group. But they also work to describe at least a loose consensus proposal that most members of the group could support as a minimum proposal. Here are some central elements for the design of benefits:

"Many (but not all) of those in our group think that only those who have consistently worked with their employer for at least a year (or more than 1,000 hours in a year) should be eligible. Businesses will be averse to protecting employees’ jobs during an extended leave of absence if they contributed only a short period of work before taking leave. Some in our group are in favor of even stricter eligibility rules, but all agree that the employee should have contributed significantly to this benefit through continued participation in the workforce (in the case of a payroll tax) and with a specificemployer (for purposes of job protection). ...

"[I]t would keep the benefits relatively targeted and inexpensive by offering a 70 percentreplacement rate up to a cap of $600 per week, for a limited number of weeks (e.g., eight weeks). ... [I]t would include job protection. ... The plan’s key elements are its budget neutrality, its extension of benefits to the middle and working class and not just the poor, and its establishment of a floor on the number of weeks of leave provided. States and private employers would be free to supplement this leave if they chose to do so.

"Our working group would support such a plan— not as everyone’s preferred policy but as a reachable compromise in our group—and we put it forward for others to consider."

I very much like the honesty and straightforwardness of the plan. It acknowledges costs. It acknowledges that the US is a diverse country in its political and economic dimensions, and thus sees the federal role not as supplying a one-size-fits-all solution, but rather as setting a baseline on which states can build. It focuses on how to provide basic benefits for those who now often have no leave at all, paid or otherwise. As the report notes: "Overall, about 40 percent of households in the United States with children under the age of 18 are either headed by a single mother or are homes in which the mother is the primary breadwinner, according to data from the Pew Research Center. This share was just 11 percent in 1960."

As have explained in other posts, I think the evidence on the benefits of family leave is not as clear-cut as I might prefer; for more discussion, see "Some Economics of Parental Leave" (March 3, 2017). For example, one purported set of benefits of parental leave is giving parents a chance to remain home with children, at least for a time, while another set of benefits is that the parents are more likely to return to the paid workforce. The goals of more time with children and more connection to the workforce are tough to reconcile. The factors that determine whether low-wage parents returns to the labor force may have less to do with the availability of paid leave, and more to do with whether their job has been protected for a time and they are easily welcomed back, or how attractive the low-wage job is to them in the first place. But the time crunch between parenthood and work is particularly rough in the couple of months right after a newborn arrives, and finding ways to ease that time crunch for the high proportion of US mothers who have limited resources seems a worthwhile goal.

Saturday, June 10, 2017

My friend Stephen Dupont, a public relations and marketing guy, did an interview with me at his website. The interview is aimed at a broad audience, with quick hits on a variety of subjects. There's much more at the website, but here's a sample:

Stephen Dupont: Do you affiliate yourself with any particular school of economic thought or philosophy?

Timothy Taylor: The great health care economist Victor Fuchs used to say that he was a “radical moderate.” He argues that moderates need to be radical, too, or else they will be drowned out by noise from radicals who are on the extremes. Of course, the problem with trying to be middle-of-the-road is that you get hit by ideological traffic going both directions.

Stephen Dupont: As the managing editor of the Journal of Economic Perspectives for more than 30 years, you’ve been a keen observer of economic trends, theories and policies. As you look back, is there anything that has surprised you over the past 30 years in the world of economics?

Timothy Taylor: For me, economics is an ongoing parade of surprises. I was surprised when the Berlin Wall came down, and a number of economists turned to the problem of “transition economies.” I am stunned that China has become the largest economy in the world. I was shocked that the countries of Europe—and Germany in particular—actually gave up their traditional currencies for the euro. I thought U.S. health care spending already sky-high back in 1980 at 9% of GDP, and now it’s approaching 18% of GDP. I did not suspect that the U.S. financial system and economy was as fragile as it turned out to be in the Great Recession of 2007-2009. I never would have thought that the Federal Reserve would take its policy interest rate down to near-zero, and hold it there for seven years. I flatter myself that my understanding of the economy is pretty good—except that I only learn to understand what has happened with a time lag of about two years.

"Urbanization in Africa began later than in any other global region and, at a level of about approximately 40%, Africa remains the least urbanized region in the world. However, as indicated in Figure 3, this is rapidly changing: SSA’s cities have grown at an average rate of close to 4.0% per year over the past twenty years, and are projected to grow between 2.5% and 3.5% annually from 2015 to 2055 (Figure 3). By contrast, globally the average annual urban population growth rate is projected to be between 1.44% and 1.84% from 2015 to 2030 (WHO 2015). From an environmental perspective, this has two important implications. On the one hand, most of Africa’s urban space has yet to emerge. Much of the area which will eventually be covered by the built environment has not yet been constructed and populated. Crucial natural assets – and significant biodiversity – thus remain intact in areas to which cities will eventually spread. On the other hand, this is changing quickly: pressures on the natural environment in and around cities are escalating steadily and these assets are increasingly under serious threat."

The existing environmental hazards levels in many African cities are often severe. They write: "For the entire region the proportion of urban residents with access to sanitation was estimated to be only 37% in 2010. Solid waste coverage also remains very limited with collection rates for many African cities at below 50% ..."

Here's a figure showing particulate concentrations in a range of cities. You think some cities in China have problems with air pollution? On this measure, a number of cities in Africa are considerably worse.

It's not a surprise that the health toll from these environmental pollutants is severe. In a number of countries in sub-Saharan Africa, the estimates of total welfare losses due to high air pollution are often in the range of 5% of GDP. Here's a table showing estimates of premature deaths from various risk factors. For unsafe water and sanitation, the estimates of premature deaths are falling. For household and ambient air pollution, estimated deaths are rising.

There's no secret about the solutions here, and White, Turpie and Letley lay them out in some detail. Protect aquatic ecosystems like rivers and marshes. Avoid spreading pollution through stormwater runoff. Collect and treat sewage. Limit sources of air pollution. Preserve some greenspace. Don't build in places that are going to flood every few years. Such a list of policy steps can easily be expanded. Again, the goal is not to limit or hinder the urbanization of countries in sub-Saharan Africa, but only to guide it in more environmentally friendly directions. But the governance issues are severe. The authors write:

"Cities need to strengthen the institutions on which effective green urban planning and management rest by addressing structural limitations, accountability and capacity constraints. ... It is also important to recognize that the widespread planning failures evident in African cities are, in essence, a symptom of institutional weakness. In a “greening” context, green urban planning fails to emerge because African urban management institutions lack the capacity to generate such plans, and,
whether or not they are environmentally sensitive, the plans that are produced are seldom implemented or enforced. While the strengthening of government institutions is key, it is also perhaps one of the most challenging issues to address. ... Finally, the green urban development agenda needs to be better financially resourced. In the context of the limited fiscal devolution characteristic of cities in many African countries, there is a very substantial agenda here."

The authors of the report are clear-eyed about these problems, but the report is nonetheless infused with a can-do spirit, and features a number of encouraging stories. I hope I am wrong, but I confess that I am not optimistic that most of Africa's cities will rise to meet these environmental challenges.

For those interested, a couple of other recent posts on sub-Saharan Africa are: